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American grocery company, Albertsons Companies Inc. was reported to be in preliminary takeover talks with Sprouts Farmers Market, an American health foods supermarket. According to sources, the companies started having discussions over the possible merger in recent weeks. Although reports point to a merger between the two companies, there still isn’t a guarantee whether the deal would go through in the future.

Should the deal between Sprouts and Albertsons go through, Sprouts can expect to receive around $26 a share, which will be an 18% premium from the supermarket’s closing price in the stock market. However, it was included in the talks that Albertsons is planning to acquire Sprouts, adding it to its portfolio of grocery stores.

The potential advantages Sprouts could benefit from the Albertsons merger is that it can have access to Albertsons buying power in the grocery and HBC categories and also be exposed to the 2,300 locations Albertsons operate.

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CFRA Research analyst, Joe Agnese, stated “We believe a potential deal makes strategic sense as increased scale would help [Sprouts Farmers Market] lower costs and price more aggressively in a low inflationary environment.” Agnese gave a ‘hold’ rating for the Sprouts stock after the merger news, adding that he still expects competition in the food and grocery industry, and could still grow ever further over the next few years.

Still, if the merger talks do not come to fruition, Sprouts would still be in the spotlight as other bigger supermarket companies could potentially woo the supermarket chain for a takeover.

Sprouts Stock

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Following the news of a possible merger between Albertsons and Sprouts, the supermarket’s stock (NASDAQ: SFM) barely moved on Monday trading, down by 0.91% to $21.82 per share with a market value of $3.14 billion. The lack of a big movement in SFM stock has indicated that investors were not overly impressed with the possibility of a merger.

For the last 3 trading sessions, Sprouts stock has been going in an upward direction after previously falling to as low as $17.38 on the first week of March.  Last Friday, SFM surged as high as 5.46% to $22.02., heading to a four-month high on Thursday and Friday.

The stock has a rating of ‘Strong Buy’ rating based on technical indicators for a daily basis; however, the stock received a ‘Sell’ rating for short-term traders, given the present uncertainty over merger talks and the industry’s weak performance.

Retail, Grocery and Food Industry

The merger talks come at a time where the grocery and food industry are experiencing food deflation, which led to price hikes and more aggressive approach against other competitions. Another reason for the decline in retail grocery sales was due to the shifting consumer demand and tastes. The change in demand and preferences has significantly hurt the industry, forcing most to offer more organic foods.

According to Organic Trade Association, Americans have recently shifted to organic produce and now around $43 billion is spent on organic food.

Among grocery stores that began shifting to more organic produce included Albertsons, Kroger, and Wal-Mart Inc. Retail companies like Target and Wal-Mart have also started offering organic foods for cheaper prices.

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However, the transition of these grocery giants to organic foods has threatened natural grocers like Whole Foods Market, as added competition has led to weaker retail sales growth.

Meanwhile, the continuously declining food prices and increasing competition in the industry has brought only weaker earnings and profits to big grocery chains. Although the declining prices mean great news to most consumers, this only means tougher quarterly earnings for most grocers and food chains. In addition to that, increasing competition from e-commerce companies add up to the many challenges and rival grocers have to deal with.

The Agriculture Department’s Economic Research Service recently reported that the prices for supermarket products have declined 1.3% in 2016, an annual decline last seen in 1967.

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